RML Technology is a leading enterprise in millimeter-wave microsystems, whose products are widely used in radar, communications and other fields. RML has mastered the core technology of millimeter-wave microsystems with its business covering the entire value chain and has built a complete R&D and production system, allowing its products to present obvious advantages in technology and craftsmanship to warrant solid competitive barriers. RML has a full order book, and the matching models for different customers have started mass production, which would lead to the continuous expansion of revenue and attributable net profit (ANP). At the same time, RML may align the interests of the technology and the management teams through equity incentives and strategic asset management plans, which may lead to an upward inflection point in operation and management and support a further increase in ANP.

Based on PE and PEG valuation methods and considering the valuation of comparable companies and RML’s high earnings growth visibility after large orders are placed, we assign 45x 2023E PE and 1.3x 2022E PEG to derive a target price of Rmb110 and initiate coverage with a "BUY" rating.

Millimeter-wave microsystem leader with fast-growing earnings and order ramp-ups RML Technology is a leading enterprise in millimeter-wave microsystems, whose products are widely used in radar, communications and other fields.

The Company has mastered the core technology of millimeter-wave microsystems with its business covering all aspects of the entire value chain and a complete R&D and production system. It is one of the few domestic companies that can provide overall solutions and product manufacturing services for millimeter-wave microsystems. A project that RML participated in has started mass production for deployment by the military. The Company’s revenue and earnings have maintained rapid growth since 2019. In Feb 2022, it announced new orders totaling Rmb2.4bn. With the successive production and delivery of the orders, the Company achieved revenue of Rmb443mn (+13.94% YoY) and ANP of Rmb194mn (+68.5% YoY) in 1H22. We expect the Company to maintain high revenue growth during the 14th Five-Year Plan period (2021-25).

Booming development in millimeter-wave microsystem technology to warrant broad market space and diverse applications RML’s main product, the millimeter-wave microsystem, is a combination of millimeter-wave and phased array technology. Millimeter waves with a wavelength between those of microwaves and far-infrared (FIR) waves have the characteristics of large bandwidth and all-weather communication. Phased array technology, synthesizing the main beam through the beamforming principle, boasts high efficiency and strong reliability. As a key common technology, millimeter-wave microsystems have been widely used in fields such as radar, communication and remote sensing. In the radar field, millimeter-wave microsystems have significant advantages in terms of sensitivity, multi-function capacity and volume and have become the mainstream trend of new radars. In general-purpose fields, with the acceleration of satellite launches in China, satellite-to-ground and inter-satellite communications may drive increased demand for phased array microsystems. In the civilian market, with cost reduction, the application of millimeter-wave microsystems in fields like 5G communication base stations and vehicle-mounted unmanned radars may increase, which is likely to cultivate room for growth.

Covering the whole value chain with high efficiency and aligning the interests of the core teams The development and production of millimeter-wave microsystems require the cooperation of multidisciplinary technical personnel, hence the high entry barrier. At present, there are few market participants, and the industry’s competitive landscape is relatively clear. In this industry, RML is the first to carry out product development and industrial production, which is one of the few companies that has achieved full coverage of the microsystem value chain. Currently, RML can independently design core chips, which is conducive to improving the overall performance indicators of microsystem products. At the same time, it is building a presence in the microwave anechoic chamber business with leading test and calibration capabilities. Its microsystem product has obvious advantages in technology and craftsmanship, warranting solid competitive barriers. During the IPO, the Company aligned the interests of the top management team through strategic asset management plans. On Sep 14, it announced an equity incentive plan targeting middle-level management and core technology backbones, which is likely to fully mobilize the core technical personnel, leading to an upward inflection point in operation and management and supporting a further increase in ANP.

Potential risks: High customer concentration; gaps in order intakes; disappointing R&D of new products; intensified market competition; infringement on intellectual property rights.

Investment recommendation: RML is a leading enterprise of millimeter-wave microsystems with products covering the whole industry value chain, and it has formed a synergy effect with the upstream and downstream links. Considering the Company’s significant first-mover advantage in the millimeter-wave microsystem field, high barriers to competition, and ample orders with the matching models for different customers already entering mass production, we forecast 2022E/23E/24E ANP of Rmb0.30bn/0.42bn/0.65bn, equivalent to EPS forecasts of Rmb1.73/2.41/3.73 and corresponding to 44x/32x/21x 2022E/23E/24E PE at the current price. Based on PE and PEG valuation methods and the current valuation of comparable companies, namely Great Microwave (688270.SH), Chengchang Technology (001270.SZ), Guobo Electronics (688375.SH) and Hollywave Electronic System (688682.SH), and considering the Company’s high earnings growth visibility after large orders are placed, we assign 45x 2023E PE and 1.3x 2022E PEG to derive a target market cap of Rmb19bn, corresponding to a target price of Rmb110, and initiate coverage with a "BUY" rating.